A Pigovian tax (also spelled Pigouvian tax) is a tax levied on any market activity that generates negative externalities (costs not internalized in the market price). The tax is intended to correct an inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product.[1] An often-cited example of such an externality is environmental pollution.

The Left often tries to justify new taxes based on their being Pigovian taxes. The classic example is a carbon tax -- it is claimed there is a social cost to carbon-based fuel combustion (e.g. CO2 production and resulting global warming) that is not taken into account by market prices. By adding the tax, these other costs can be taken into account, likely raising the price of these fuels and thus both reducing their use and providing a higher price umbrella for alternatives.

For years, I accepted these arguments at face value. I might argue with them (for example, I think that the Left has tended to spot 10 of the last 2 true negative externalities), but I accepted that they really believed in the logic of the Pigovian tax. I am now becoming convinced that I was wrong, that the Left's support of Pigovian taxes is frequently a front, a way of putting a more palatable face on what is really a naked grab for more taxpayer money by public officials. To support this emerging hypothesis, I cite two examples.

1. Proposed Carbon Tax in Washington State

This last November, a carbon tax was placed on the ballot in Washington State. In many ways, it partially mirrored my own proposal (here) by making the tax revenue neutral, ie the new carbon tax was offset by a reduction in other regressive taxes, particularly other consumption taxes. If the Left and environmental groups truly embraced the Pigovian logic of a carbon tax, they should have jumped at supporting this initiative. I discuss what happened in depth here but Vox has a good summary:

The measure, called Initiative 732, isn’t just any carbon tax, either. It’s a big one. It would be the first carbon tax in the US, the biggest in North America, and one of the most ambitious in the world.

And yet the left opposes it. The Democratic Party, community-of-color groups, organized labor, big liberal donors, and even most big environmental groups have come out against it.

Why on Earth would the left oppose the first and biggest carbon tax in the country? How has the climate community in Washington ended up in what one participant calls a "train wreck"? (Others have described it in more, er, colorful terms.)....

the alliance’s core objection to I-732 is that it is revenue-neutral — it surrenders all that precious revenue, which is so hard to come by in Washington. That, more than anything else, explains why alliance groups are not supporting it.

Opponents say they wanted to use the revenue for climate-related investments, but even if true there are two things wrong with this. First, it shows ignorance of the economic theory of the Pigovian tax -- the whole point is that by raising the price of carbon-based fuels, markets will find the most efficient way to reduce this fuel use. The whole point is that it is way more efficient to reduce CO2 production through this simple pricing mechanism than it is through government cronyist winner-picking "investments". The second problem is that such promises of funds dedication never last. Supposedly the tobacco settlement was all supposed to go to health care and tobacco-related education, but there is not a single state where even a double digit percentage went to these things (the American Lung Association estimates just 2% of the funds go to the original purpose). In New York, the entire tobacco settlement stream was securitized and used to plug a single year's general budget hole. You can be assured the same thing would happen with carbon tax revenue.

2. Soda Tax in Philadelphia

Last year, Philadelphia passed a large soda tax. The justification for such a tax is that such drinks cause obesity and other health issues. Either for people's own good or to reduce the future burden on government health care programs, the whole point of such a tax is to reduce soda consumption. Or so it was justified.

But now, once the tax took effect, the city government that passed the tax seems to be shocked and surprised that soda consumption is way down. You would think that they would be declaring victory, ... that is, if the point was ever to reduce soda consumption and not just to raise some extra revenue. Via Reason:

For now, Kenney and other city officials seem unfazed—dismissive, even—of the problems caused by the new tax. A city spokesman told Philly.com that no one knows whether low sales figures and predicted job losses are anything more than "fear-mongering to prevent this from happening in other cities."

Kenney put an even finer point on it.

"I didn't think it was possible for the soda industry to be any greedier," Kenney said in an emailed statement to Philly.com reporter Julia Terruso. "They are so committed to stopping this tax from spreading to other cities, that they are not only passing the tax they should be paying onto their customer, they are actually willing to threaten working men and women's jobs rather than marginally reduce their seven figure bonuses."

Its clear that this tax justified as a pigovian tax is really no such thing. City officials seem to be honestly surprised that consumption is down as the result of a Pigovian tax whose purpose is to... reduce consumption. And if they really did not expect the tax to get passed on to consumers, then how does it work? In fact, city officials are actually worried that reductions in soda consumption is going to cause the tax to yield less money than they expected, creating a hole in their budgets.

* * *

Going forward, I plan to apply an order of magnitude more skepticism to any future calls for Pigovian taxes. I think the first thing I will ask of each new suggestion is "do you still support this tax if I were to make it revenue neutral, say by offsetting it with reductions in another regressive taxes?"

34 Comments

Mr. Generic:

Dan Wendlick:

The tobacco settlement was even worse than what you're portraying. By making state governments dependent on the income stream from what was effectively a tax, they made efforts to actually reduce tobacco usage counter-productive, and guaranteed that the market share of the companies involved in the settlement would be protected, under the guise of "if you're not part of the settlement, you don't get a license to sell tobacco products in this state".

DirtyJobsGuy:

Thirty years ago when I was working in Nuclear Power development, a carbon tax was proposed in the EU. The Greens lobbied hard to get nuclear and hydro power production from being used to set baseline carbon reduction prices. The worry was that the French would get too big a credit for not emitting CO2 so they would get bigger tax payments/credits. The externality issue was just a ploy for political ends to promote solar/wind power.

jimc5499:

A City that I work in sometimes passed a 40% tax on parking revenue. The idea was to drive up the price of parking so that people would take public transportation or carpool. For a while no one did either so the City got a windfall. Now that some companies have left the City and some people are carpooling the revenue from this tax is down causing a budget shortfall. One of the proposals is to assess companies (including mine) that have their own parking 40% per space, of the cost of the daily parking average as a tax.

Matthew Slyfield:

GoneWithTheWind:

The left and even some on the right believe that all problems are best solved by a combination of higher taxes and lower personal freedom. I am a skeptic on AGW but I am willing to agree to what would probably be the most effective reduction in CO2 and other pollutants and that is to ban all air travel including private planes. Simply end it. No one needs to fly to Europe or vice versa. And air travel is probably the single largest polluter. I will miss my trips to Hawaii but I will make the sacrifice for the good of mother earth. But you know why that will never happen even though it would be the single most effective reduction in C02 every proposed? Because there is no revenue. This is and always has been about the revenue and seizing power and that is the end game. No one really cares about the CO2 except for a few useful idiots.

Another angle to that played out in Minnesota, where faux Republican Tim Pawlenty implemented a special tax on cigarette companies not party to the settlement, because so many people were starting to switch to cheaper (often Indian made) brands.

Gloobnib:

Coyote - you missed the biggest "tell" on the philly soda tax. If it was really to reduce sugar consumption, the tax should only apply to sweetened drinks. But they also applied it to diet sodas as well. I believe they were the first major area to do so, as most previous laws taxed only sugar-added drinks.

Matthew Slyfield:

Maybe, but I've heard a few of the activists pushing it explicitly claim that low end service business can absorb it just taking less profit. A Business where half of all their costs is labor and which only has a profit margin under 5% (the national average across all industries. Grocery retail profit margin averages 0.5%) cant absorb a 100% increase in labor costs without going bankrupt.

Sam P:

Actually, airlines are pretty good at keeping airplanes nearly full. Fuel efficiency (passenger miles/gasoline gallon equivalent) is a pretty good proxy for CO2 emission, so this chart shows that airlines score really well. Amazingly, transit buses do poorly, they must be running empty or nearly so a lot.

Not shown are passenger ships, which are likely to be very efficient, except the big ones mostly aren't for transporting people from point to point, but as a floating playground.

mlhouse:

The government needs to have tax revenues and I have always favored taxing consumption activities over productive activities. Historically the U.S. government was almost completely financed by tariffs and "sin" taxes. While that is clearly impossible, I always favor moving taxation to that side. If it were tax revenue neutral I would distinctly favor:

Q46:

Had Pigou taxes, and particularly a 'carbon' (they mean carbon dioxide) tax been introduced circa 1800, we would all still be working dawn to dusk on the land.

A Pigou tax is supposed to encourage change to an alternative by making the alternative less expensive. So a factory belching out noxious smoke should find it cheaper to install filters and scrubbers in its chimneys, or alternative production methods than paying the Pigou tax. And that is only if - a big if - the Pigou tax has been pitched at the correct level.

However where no alternative exists it is just a punitive tax and futile since the market it seeks to make more efficient is inelastic, so people will simply spend more on the taxed good and spend less elsewhere and of course demand higher wages = inflation.

There is no viable alternative to fossil fuels for electricity generation except nuclear power. Nuke power plants are more expensive to build and decommission. A Pigou tax encouraging a change from fossil fuels to nuclear would make sense, but forcing a change to electricity generation based on 'renewables' which cannot provide a viable alternative is destructive.

If the intention is 'to save' future generations, reducing their putative ancestors to pre-industrial life, with famine, disease, low life expectancy and high infant mortality is hardly the way to do it.

The fact that there has been no effort to change to nuclear these past 20 years or so of hysteria, an entirely affordable, workable alternative (France produces 80% of its electricity from 59 nuke plants) is proof the whole Man-made Climate Change thing is a scam which no politician takes seriously but which provides a means of exerting more control-freakery over citizens.

Q46:

Q46:

And by 'simply' ending air travel what would the cost from lost economic activity - such as no airfreight; no tourism; no business meetings; perishable foods no longer available long distance, for example?

Imagine if the railways had 'simply' been ended in Victorian Britain or 19th Century USA.

The 'simple' solution is to switch off the electricity and then we can all go back to subsistence living on the land like our ancestors and the other 6 billion people on the Planet.

CC:

One of the fallacies of government is that if there is a problem the government must do something. Doing something makes the politician look good. There are some problems that are either unsolvable or that no one knows how to solve. Who can solve the drug problem? Who can solve people cheating on their spouses? Trying to solve such problems gums up the works and may also create worse problems.
As far as just being grabby, of course politicians are grabby and mostly fail to see how being too grabby kills the goose that lays the golden eggs.

Penkville:

Strewth mate, you really believed these new taxes weren't meant simply to be an additional fund raising mechanism for lefties? Bonus points on the left for furthering the nanny state too of course. You simply can't be too cynical about these things.

SamWah:

ErikTheRed:

I agree, but I hesitate to use the word "stupid." In the case of Jim Kenney and the politicians, it's straightforward evil dishonesty. In the cases of their supporters, it's because they were taught to do this. Most of us don't look at North Koreans who worship Kim Jong Un (or whoever it is this week) and call them stupid - they were simply taught this and weren't exposed to competing viewpoints. I think this is similar with much of the left in America - the eduction systems and media make an extremely hard and often uncontested push for progressive values and thinking. Conservatives have largely been browbeaten into not pushing back, and generally have so many hypocrisy issues that when they do push back they're easily deflected (progressives also have as many if not more hypocrisy issues, but as the ones with more power, credentialism, and an overall aura of authority their hypocrisies are easier to sweep under the rug. Yes, it's unfair, but that's life). This is one of the reasons I think that ultimately small-l libertarianism has a better chance of pushing back: the focus on individualism and willingness to engage in sectarian infighting holds libertarians down politically, but it lets them keep a large piece of the moral high ground that's far less susceptible to assault in these sorts of debates.

GoneWithTheWind:

Hopefully you didn't miss the point. Shutting down the airlines would indeed cut C02 emissions considerably. Taxing airlines or air travel won't. The point is this isn't about cutting down on C02 emissions and never was. The who AGW scam is about seizing money and power. But for what it's worth I would be Ok with shutting down the airlines.

GoneWithTheWind:

Sam P:

The chart I linked to above was based on actual data reported by airlines and transit organizations. Poking around, I see that a Boeing 777 variants can achieve as low as 2.7 liters/passenger-100km, which works out to about 87 miles/gallon/passenger of jet fuel (diesel, more or less). A full minivan is actually pretty efficient, though passenger cars average slightly above one occupant.

jmod46:

Ah, the groceries and restaurants are "price gouging" when they decide they don't want to eat the tax cost inposed by the politicians. Maybe the politicians will lead by example and declare they are willing to reduce their own salaries by a percentage amount commensurate with the new tax, eh? Just to show the greedy owners of groceries and restaurants how it's done. Obviously, it's no biggie. They should jump at the chance to polish their virtue-signaling creds. Besides that, it's for the chldren, and they don't hate children, do they?

Pigou taxes don't make sense to me, especially as actually justified and applied by governments. Some of the following overlaps what Coyote has written.

Say I manufacture things. Government employees calling themselves economists decide that I am harming my fellow citizens at the rate of $80 per ton of the CO2 I produce. So, I pay that tax, increase my prices 10% and sell 10% less each year than I could have at the lower price. Say I produce 10,000 tons of CO2 and pay $800,000 in CO2 tax yearly.

This Pigou tax directly accomplishes one thing. At least those customers who remain are paying enough to acquire the goods they enjoy and also pay for the harm they are causing along the way. Academically, these goods are valuable enough to the purchasers for them to pay for the external damage caused. That is a good first requirement. I am not able to sell to the 10% of my former customers who do not value my product enough to pay for its externalities.

I am supposedly causing harm to people who are not my customers. One can think of it as my customers paying $800K yearly to the government through my company for permission to harm others, because my customers benefit sufficiently from buying my product.

The big issue is what happens next. The government should be using the tax revenue to directly offset that harm to others, say by lowering the taxes they pay. If not, then I am merely paying the government for permission to harm others. They are still harmed. Effectively, I am licensed to harm one group, or everyone, as long as I sufficiently benefit my customers. The government happily runs what amounts to a protection racket, protecting me from those harmed as long as I pay enough to the government. The level of the CO2 tax is irrelevant, but is conveniently tied to the noble computation of harm from CO2 emissions.

One might propose that the CO2 tax will be used to lighten the tax burden on others. But, we observe that this isn't how taxes are used, and wouldn't compensate for the individual harms brought to others, say the harm to people who now pay no tax. And, what about the harm to foreigners?

In reality, the government collects this tax and spends it on bureaucracy and other value-losing, socially negative projects, as usual.

So, if one believes that CO2 causes extra death, drought, hunger, displacement from rising oceans, bees dying, expanding deserts, and such, then a Pigou tax is not transfered to the proper people. (I don't believe that CO2 is a problem at all, by the way.)

How can one justify Pigou taxes that in practice merely fund politicians rather than compensate the people supposedly harmed?

In summary, the harm supposedly caused by productive activity is only an excuse to levy addtional taxes, and is never used to offset the harm done, in practice.

GoneWithTheWind:

The problem with the whole fuel consumption per passenger thing is it's only purpose it to cloud the issue. A 707 uses about 30 gallons per minute. It burns about 30 gallons per minute if it caries 100 passengers or 1 passenger. I once flew in a 747 from New Orleans to Seattle and there were 4 passengers in the plane. unusual I'm sure but the actual fuel mileage of the 747 didn't change. I owned a minivan once and it burned less than 1 gallon per 25 minutes at highway speed. All of this begs the question; is the intent of the carbon tax to decrease carbon emissions or to create a tax windfall for governments? If you really want to cut CO2 cut out all frivolous burning of fuel. I suggest ending air travel and you countered with ending ship cruises. Let's do both. Neither one will increase taxes and both would substantially cut C02. My point is not that we would do it but that we have no desire to actually cut C02 the whole purpose of the AGW scam is to raise taxes AND to allow more power to the elite through regulations.

MJ:

I wouldn't hesitate at all to apply the label of "stupid" to Kenney and his minions. Kenney's statements are not only demagogic, but mind-numbingly ignorant. As Warren points out, he clearly has no idea how tax incidence works if he thinks this tax will be entirely absorbed by wholesalers and/or retailers. And to reiterate the other key point, if by some miracle the tax burden did end up being distributed in that fashion, the Pigovian justification for the tax would no longer exist.

It's possible to believe his statements about the tax's effect thus far are merely cynical politicking, but the fact that this tax passed in the first place, presumably under the justification that it would improve public health, suggests that those in charge earnestly believed it would work to that effect. If they didn't, and they just wanted to raise revenue in a manner that is disguised from the consumer, they could have just imposed a sales tax on retailers or wholesalers and done the same thing -- claim that those businesses are "greedy" when they inevitably pass on part (or all) of the tax to consumers in the form of higher prices.

It's not too much of a stretch to suggest that the voters there are of low intelligence either. Philadelphia is a large central city with an army of low-income and poorly-educated residents. That and the city's one-party orientation leaves it vulnerable to all manner of chicanery and demagoguery with no real checks on power. They get the government they deserve.

MJ:

MJ:

One commercial passenger jet from NY to LA uses more fuel than it would take to drive all of the passengers there foru to a SUV.

I don't think that's actually correct. Do you have a source?

But even assuming it is correct, it misses the point of why people fly in the first place. It would take several days to drive form NY to LA. Flying only takes a matter of hours. All resources are scarce, not just the environment. And that means that the relevant tradeoffs need to be carefully examined.

That was a separate tax that applied to all. I'm referring to the tax that just applied to cigarette companies NOT party to the tobacco settlement, who didn't have to massively raise their prices to collect. The state refers to it as a "fee on non-settlement brands." It's $5 per carton.

Sam P:

slocum:

This is also why politicians and bureaucrats have been working hard to clamp down on vaping. These sociopaths are literally willing to kill people (by discouraging them from switching to a vastly safer and cheaper alternative) merely to protect tobacco revenue streams. And they think tobacco company exec are evil.